Cash, not idealism, behind ISP embrace of music biz

Virgin Media, a large UK ISP, has agreed to pass on music industry nastygrams …

Virgin Media, one of the UK's largest ISPs, has agreed to forward British music industry nastygrams to subscribers suspected of illegal file-swapping. The move has proved hugely controversial already, generating charges of "spying on users" and even a BBC column on how Virgin could just go stuff itself into a trash can. But left undiscussed is the core question of why Virgin is whoring itself out like this; the law doesn't require it, and passing on letters from the British Phonographic Industry (BPI) won't make an ISP more dosh. Or will it?

BPI boss Geoff Taylor got his own BBC column last Friday to respond to all the criticism of the deal, and in it he gave a hint about what exactly is going on. "We believe that ISPs, far from being a simple pipe, can become significant distributors of digital media, and share in the tremendous value that would be unleashed if more music were accessed legally online," he wrote, then made a brief reference to "ISP partnerships" which are the "next logical step in our maturing digital music business."

The reference was brief but clear, so long as you understand that ISPs at all levels are terrified of becoming mere bit-haulers. If being an ISP means only that you can schlep bits from point A to point B, a competitive environment will eventually mean 1) that fat profit margins go bye-bye as you are reduced to a dumb pipe charging one low rate for all bits and 2) that customers have no loyalty to your service, since any other ISP can also schlep bits around with the same accuracy.

What ISPs want is a piece of the fat ad/content pie. Like Cassius, these companies have a "lean and hungry look" as they eye the porcine profits being raked in by other companies that sell both ads and goods using the very networks that the ISPs have built. Ed Whitacre's initial comment about charging companies like Google, that might want to reach customers faster, was a crude attempt at slicing out a piece of this pie; partnerships are the newer variety, and they have the great benefit of not coming across like an extortion racket.

You can see this on the advertising side with companies like NebuAd and Phorm, which are harvesting ISP traffic data on both sides of the Atlantic and using it to deliver highly-targeted ads. ISPs take their cut, and everyone (except for the irate consumers, who have yet to see these opt-out systems as an "enhancement) goes home happy. Virgin Media, not surprisingly, was one of the first ISPs to agree to use Phorm's system.

If ISPs have their way, content partnerships with the movie and music businesses could offer another cut of the revenue being racked up across ISP networks, and such services could help ISPs differentiate themselves from rivals. There's nothing necessarily wrong with the idea, though the potential problems are legion; for instance, will consumers trust an ISP with a music service of its own to do nothing to "discourage" the use of competing offerings?

But whatever the possible pitfalls, the money (or the possibility of future money) appears to be a key reason behind Virgin's decision. There's no hint yet how Virgin might get into the content game, and there are plenty of competing possibilities. One controversial idea that we've covered before would be some form of ISP surcharge that would allow users to download whatever they want, legally. Steven Page of the Barenaked Ladies backed the idea last year and it has some industry support.

The rhetoric around the deal has been a bit overheated. Virgin is passing on letters when provided with IP addresses by BPI, not spying on users itself; it also has no apparent plans to actually disconnect or sanction users who receive the letters (yet). The company decided to play BPI's game not because it has any real incentive to go after illegal downloaders, but because it has a much bigger incentive to supplement its monthly fees with music money.

Even with reduced music industry revenues, getting into the distribution game and sharing in "the tremendous value" it could generate still makes it an appealing prospect for some ISPs.